Under Section 263A, certain businesses must capitalize direct and indirect costs related to producing or acquiring property. These costs become part of the property’s basis and are recovered through depreciation, amortization, or cost of goods sold—not deducted immediately.
A taxpayer cannot capitalize marketing expenses.
When UNICAP Applies
UNICAP applies when a taxpayer produces or acquires for resale real or tangible personal property and does not meet the gross receipts test.
A taxpayer produces property when they:
- Construct or build
- Install or manufacture
- Develop or improve
- Create, raise, or grow
Tangible personal property includes items such as films, books, artwork, recordings, and similar creative products.
For 2025, the gross receipts test threshold is $31 million (3‑year average). Meeting the test exempts small producers and resellers from UNICAP.
When UNICAP Does Not Apply
UNICAP is not required for:
- Small producers/resellers meeting the gross receipts test
- Property produced for personal or non‑business use
- Section 174 research and experimental expenditures
- Intangible drilling and development costs (oil, gas, geothermal)
- Property under long‑term contracts, except certain home construction
- Timber and ornamental trees and related land
- Qualified creative expenses of freelance writers, photographers, and artists
- Natural gas cushion gas costs
- Property with substantial construction before March 1, 1986
- De minimis property provided to customers as part of services
- Loan origination costs
- Producers using a simplified production method with indirect costs of $200,000 or less
Core Principle
UNICAP ensures that costs directly tied to producing or acquiring property are capitalized—not expensed—unless a specific exception applies.